There is no doubt of the opportunity modernizing technology and infrastructure can create for efficiency and growth, particularly in the world of banking. In this episode, our experts discuss the complex challenges of undertaking mainframe modernization and the risks involved, as well as the risk of not modernizing and what can happen if you don’t. How do you keep the business running during the transformation and work within the limitations of legacy apps that are not yet modernized? The ever-increasing data sovereignty and compliance concerns add another layer of complexity. And, with upcoming regulations on data and AI governance, like DORA and the AI Act, should banks be thinking about their own modernization journey?
There is no doubt of the opportunity modernizing technology and infrastructure can create for efficiency and growth, particularly in the world of banking. In this episode, our experts discuss the complex challenges of undertaking mainframe modernization and the risks involved, as well as the risk of not modernizing and what can happen if you don’t. How do you keep the business running during the transformation and work within the limitations of legacy apps that are not yet modernized? The ever-increasing data sovereignty and compliance concerns add another layer of complexity. And, with upcoming regulations on data and AI governance, like DORA and the AI Act, should banks be thinking about their own modernization journey?
Featured Experts
Sarah B. Nelson 00:02
Welcome to The Progress Report. I'm Sarah B. Nelson, Chief Design Officer for Kyndryl Vital, and today we are going to explore the world of banking. We're going to look at the ethical and legal implications of things like data and AI, ESG, technology and infrastructure modernization, and how you do all of that in the highly regulated world of banking. We have some fantastic guests with us today. We have Ronan Hughes, who's the Core Banking Principal Architect for the Bank of Ireland. He's made a career of designing and delivering high quality complex payment systems in an ever-changing legislative environment, and has really worked extensively in new technology adoption and application. And one of the things I love that I saw, Ronan, is that you're a big believer in a highly collaborative and agile approach to all of this, which I'm sure we'll get into at some point. And then we have Chris Davis from Kyndryl. He's the Managing Director for Ireland and the Senior Partner for the Bank of Ireland, too. And Chris has been working for over 35 years in banking and financial services. And he's been a CFO and Executive Director at lots of banks like Co-Operative Bank, Williams & Glyn, Ulster Bank and RBS. And one of the things I loved about when I was reading your bio, Chris, is that you're dedicated to making financial services fairer, and focused on delivering ESG positive outcomes. So welcome, Chris and Ronan.
Chris Davis 01:27
Thank you,
Ronan Hughes 01:29
thank you.
Sarah B. Nelson 01:30
I want to set the stage a little bit, Ronan. If you could tell us just a bit about the Bank of Ireland, the Irish banking landscape, and maybe how that differs from other European countries.
Ronan Hughes 01:40
Bank of Ireland has entered its 200 and 40th year of business. So we've been around for quite a while. I was recently in our original headquarters in College Green, which are owned by the bank. It's a building in the center of Dublin that was originally the basis for the U.S. Capitol building. And in that they have the original charter for the Bank of Ireland, which is written in a large piece of goatskin signed by King George II. So that kind of gives you a sense of the kind of history that we're dealing with. Our technology systems aren't quite that old, but we do have some legacy technology, and obviously a huge adoption of new wave technology. In recent years, we've been in a large transformation journey recently. And my role within Bank of Ireland as a principal architect for core banking is to look after that strategic roadmap for the core banking systems, our central ledgers, products and services, and those platforms that support all aspects of the bank going forward. So at the minute, as part of that, we're on a very aggressive journey to modernize, simplify, and take us to the next level in terms of being able to provide that service into the future for our customers.
Sarah B. Nelson 02:40
So actually, I was going to ask you about this, Ronan, you wrote an article for Kyndryl.com that was about pursuing mainframe simplification.
Ronan Hughes 02:47
Yeah, so from the bank's perspective, we have a large and complex mainframe environment across a number of our core platforms. It's been tried, tested and very stable for a very long time. The original Genesis of that mainframe system and of the first applications on it go right back to 1975. There's been a huge land shift in terms of what's expected of a bank, especially in the last 10 years. In terms of real-time availability, 24 by seven servicing instant payments, real-time data and analytics associated with our customers expectations, the ability to serve our customers 24 by seven, and the presence of social media, for example. And that's not what the mainframe was built for. It's not to say that it can't support it, but certainly, as we move into the future, we want to ensure that we shrink, simplify, and hollow out, that mainframe to ensure that it remains our central system of record. And then at that point, we can look at what we need to do for the future to support our customers and services going forward.
Sarah B. Nelson 03:39
I'm really fascinated by this 1975 component to this, too. And how you have these two different worlds sitting in the same place. It's pretty interesting. So Chris, I'm curious, in that context that Ronan is talking about, what are some of the challenges that you're seeing?
Chris Davis 03:53
Ronan beautifully described the problem that the bank faces, but that problem is faced by virtually every bank in Europe. And there's a few modern banks and we all know of the Starlings and the Revoluts, who haven't yet got legacy. I say "yet" because they will have legacy. It's only a matter of time. And the mainframe legacy is just a particular form of legacy, but everything gets older. There isn't anything wrong with that technology. And as a core ledger, you know, book of record, which is what it is, it's actually superbly efficient and probably one of the best places to put it, certainly the only place to put it at the time it was developed. But those extra functionalities that are required today to support the applications and usages that Ronan put forward. So mobile applications, customer journeys, which involve call centers and PC apps, mobile phones, and instant payments. All these things have required folk to add to that core. And it's made a very complex "spaghetti" I often call it because, you know, you can't see through what's connected to what. And the challenge then is, one, that makes it less stable because you've put more stuff on and you find it harder to change it. But also, it adds a cost because you've got all this extra stuff to manage. And it adds a huge overhead when you come to launch new products, or try to react to customer demand, which obviously you want to do as a bank. And so your development and change lifecycle extends, because it's all stuck together in this complex mass. Get back to the core purpose of that mainframe application, clean it up, and then put proper interfaces between the application so they're not stuck together with sticking tape, but they are properly connected. So it's getting that structure into the mainframe and into your enterprise architecture, which then allows you to delight customers.
Ronan Hughes 06:06
And I suppose, sorry, just to add on the point that Chris was making there, and the questions you'd asked as well, mainframes are hugely stable, they're incredibly efficient, and they're insanely secure, which are three really, really important factors that people like. That's why they're still here. They're good at that. The main risk of not modernizing, though, from a mainframe perspective, for any of the new digital entrants and in the banking space, especially in Europe, none of them are building at mainframes, if you were starting today, you wouldn't decide that that's where you would build the bank. So the main risks of not modernizing and looking to the future are the operational risks associated with it, because it is an older platform, older technologies, older skill set and capabilities. Finding people who know and understand that technology is becoming increasingly difficult. And then you have the ever-increasing speed and cost of change. So the change that is required has, over the last 10 years in particular, has accelerated beyond belief in terms of regulatory responses and requirements and customer expectations. We tend to build most new functionality products and services off host now. And that being the plan in the future, then the intention would be that you want to get yourself off one platform at some point in the future that would tie you to that legacy technology, skill set capability based on risk, etc.
Sarah B. Nelson 07:17
That's interesting, because I was thinking about things that would be driving this that are external to that. So one of them is expertise, that's sort of the reality of that. And I think a lot of folks in the industry are experiencing exactly the same thing. You probably can't talk about all this without talking about data and AI. What are the sort of the implications of some of these external factors in your strategy?
Ronan Hughes 07:38
Obviously, data is a massive concern for all banks, because the amount of data that banks tend to hold in terms of customers, customer ID, authentication, their transaction history, financial status and analysis. That's data that's pretty sensitive. And it is under a huge amount of regulation and security as well. But how we adopted those new technologies going forward is a big question. And one of the big questions from a banking perspective, especially with the emergence of the first draft of the AI Act in the EU for banks to deploy that specifically, you've got big questions around the principles of trust and transparency. Specifically, you're looking at the purpose of AI is to augment or not sort of replace human intelligence. So you're not looking to replace people, you're looking to try and enhance the experience and the data and make it much more intuitive for people to use. So all of those data insights need to belong where they are that belong to the customer. They shouldn't be taken off and given anywhere else. So putting controls and security around that in the new world and the new emerging technologies is a big consideration and factor. And then finally, all of these new technologies such as the AI systems, etc., and any use cases that deploy it, they need to be transparent and explainable. You can't have, you know, a new model going off and doing something and you don't know or understand what it's doing. That's just not going to be acceptable. So that being the case, you have to sort of build along those main pillars of trust. And the overriding principle above all of that is privacy. Especially when it comes to banks and their data, and what you're doing with customer data as well. So before you would adopt any new AI use case, you're going to have to have the relevant governance and controls in place to make sure that is the case.
Chris Davis 09:11
It's funny. You've talked about AI, which has been top of the agenda at most of the boards I sit on today, and has been increasingly a conversation. But I don't think there's a single board that I sit on that hasn't asked themselves the question of, "Now we've got ChatGPT and other things, should we be using those in our business? What's our policy?" They have to have a view because the regulator will expect them to be discussing it. Banks are built on the basis of trust. If you lose trust, you lose your business. And so there's a huge focus on, "How do we make sure our customers trust us?" And therefore, yes, there's a regulatory angle, but it's also the board and the executives job to ensure that they protect the trust for their customers.
Sarah B. Nelson 09:58
Chris, so I wanted to ask you about how you think ESG plays into it. We've talked a lot about these different kinds of considerations, but what do you think in terms of financial industry and ESG?
Chris Davis 10:11
That's another topic that every board I'm on is talking about. It's come about, I think, from three distinct directions. One is that, clearly, there's a regulatory demand. So you've got to report on your ESG footprints and there's new European legislation coming in and worldwide legislation. And therefore, you've got to know, firstly, your own outputs and carbon footprint, but now, what the suppliers you use, their footprint, and that's much harder to achieve, because you go look through the supply chain. The second one is there's a commercial reality appearing that actually there are people starting to move money in the financial stock markets away from the sort of gas legacy oil industry and move it to modern renewables. And so people are starting to say, "Well, at what point do I start to shift my base? And at what point would I risk being seen as a laggard?" So if I'm a bank, do I want to be banking petroleum companies or not? And these are really big decisions that need to be taken, because by not doing it, you're causing some potential issues to existing customers and stuff. By doing it, you're potentially keeping that industry going for a startup. And where I was at Co-Op bank, we have had for 30 years a policy of not banking anyone who dealt with fossil fuels. So that was part of our ethical agenda and it was easy for us to push ahead there. But once you've got customers, how do you deal with that? And then the third and increasingly important piece is each of us has a moral obligation to try and leave a better planet for our children. And at the moment, it looks as though we're not going to do that. So I think ESG is here to stay. And the reports on the news today that we've had our first year at 1.5 average temperature rise, you know, that's a scary place to be. And interestingly, technology and businesses like Kyndryl and the Bank of Ireland technology team have a huge opportunity to really improve the carbon footprint through a whole range of things, whether that's around working practices and enabling hybrid working. Whether it's around improving technology so you're not using old technology which is energy inefficient, because it wasn't designed to be energy efficient, to newer technology, you know, there's a lot we can do to make an immediate improvement on our carbon footprint.
Ronan Hughes 12:50
Basically, when you're looking at the ESG element of how that impacts business as a whole, and banking in particular, there's the political element to it, the moral element to it, and the fiscal element to it. Politically, if the situation gets any worse, they're going to generally tend to legislate their way out of it, which means you've got bigger oversight, more compliance and a harder job to try and deliver against that with more change. From a moral perspective, you want to make sure you're doing the right things so that you're going to be on the right side of history in the future. But people don't tend to talk as much about the fiscal element of it. The shorter your supply chain, the more sustainable it is. The cheaper the costs are, the more controllable it is, then the better you're going to be equipped to continue to build and grow in the future. So if you're less reliant upon traditional energy services, like we've seen in Europe over the last couple of years with the inflationary pressure and energy price hikes, that can only be a better place to be from a business perspective.
Sarah B. Nelson 13:41
So, there's a couple of factors here. So, why don't we talk about increased demand and an expectation of customers for what their experience is going to be like. And this means across many different touchpoints and we talked about the infrastructure that as needed to support that. I had understood that there's a growing awareness in the Irish population at large about the impact of data centers explicitly on the environment. And what I'm hearing is that there's this tension between how you serve the customers, and then this awareness. I'll just say in the States, I don't think there's not a broad discussion about data center environmental impact. So I'm curious about that dynamic of your social environment, your bank trying to develop trust and this environmental impact of data centers.
Ronan Hughes 14:26
There's definitely an ongoing debate in that respect. So Ireland, as you may or may not know, tends to be the European headquarter hub for pretty much any large multinational organization for tax purposes. But as a result of that, we have some absolute behemoth data centers that have been delivered which, you know, have been very controversial in terms of planning permission location. And as a result of that, they tend to try and address as much of the ESG considerations as they can, but at the end of the day, you know, you've got a data center which is three times the size of the largest shopping center in the country. It's sitting right there, you drive past it every day on the way into work, you can see it, it's obvious. But some of the elements of that are sort of unique to Ireland. And it's a social construct. So for example, Ireland has the youngest population in Europe, so 33% of the Irish population is under the age of 25. And given that particular demographic, there's a huge difference in the perspective of those concerns. For the "under 25s" versus say, for example, "the over 50s". And that being the case and given how that will sort of grow throughout the Irish demographic going forward in terms of the population, that's probably not going to disappear anytime soon. And then secondly, within that, because of such a young population as well and where we're located, they tend to be very, very digitally native. So penetration of smartphones in our society is over 96% in terms of people in the country who have a smartphone, and that's a huge aspect of it as well. They're not just reliant upon the local parish news, the local county news, or you know, the location that they live in. They're very plugged in to what's happening on a global basis, on an international basis. Those kinds of awarenesses plug in hugely to the buy-in to the ESG element of things, but it also means they have a much wider consideration of what data means and how important it is. And also the access to real time information, real time financial services. Real time payments, for example, is a huge growing part of cultural acceptance and normality in society these days.
Chris Davis 16:21
I attended a BITC Ireland event, and the minister stood up talking about some of the government's policies on the green agenda. And I have to say, the Irish government seems to be doing a better job than the UK Government of having a progressive strategy in this area. And he was talking about some developments they're making in Dublin where the output from the power station is going to heat flats which they're building in that area. I was really impressed about the forward looking nature and the fact that they're building it into their plans as a country. And I do think, in Ireland, it is a country which has beautiful scenery, a beautiful landscape, a farming industry. It needs to look after its environment, so I hope Ireland will keep being a green leader. The Bank of Ireland has a real role to play there and an opportunity to be one of the leading financial institutions driving that forward.
Sarah B. Nelson 17:17
One of the things that I'm wondering is about being a leader in this area. To what degree are banks collaborating amongst each other around ethics, around data, or around ESG work across Europe? Maybe it comes even into the Americas? I'm just curious, how do you all work together? Or do you?
Ronan Hughes 17:38
We certainly do, there are a number of different forums that operate at a national and an international level. So Ireland's actually slightly different in that respect to most other European countries in that we're a relatively small country of about 6 million people. So equivalent size to Scandinavia in the Nordic countries. But we have a much smaller banking industry in terms of we could do very large banks and a large building society bank as well, but recently, a number of banks have exited the country and left, which leaves us actually with a slight dearth of competition. It means that between that very small community, you're able to get consensus quite easily because you don't have a huge raft of different opinions. And Chris knows from his time previously sitting in some of these organizations, we've got an independent regulator, the Banking and Payments Federation of Ireland. Then at a European level, we have the European Banking Association, which is the sort of the industry body for all of the banks coming together. You've got all their organizations like the European Banking Authority and the European Payments Council from a European oversight level who provide the rule books, the handbooks, and the guidance for how to deploy these things internally. And then overseeing all of that you've got the European Commission who will pass the oversight and legislation that then comes into force. It is quite collaborative. And we have good working relationships, nationally and internationally, across all sorts of elements being data logging, upstream risk in terms of forthcoming legislation, financial crime, emerging fraud, and other issues, in that respect, in order to ensure that everybody can learn from shared experience and provide the best service possible.
Chris Davis 19:05
It's great to see that sharing. However, I'm sure you'll agree there are areas where we're restricted. It's a fine balance area between sharing generic data and stuff that is not restricted, and making sure that you're not breaking that trust. I think also, on an ESG front, you can probably share more freely. How do you create your baseline? What can you do to improve your carbon footprint? Can you work together to improve some of those logistics in banking like cash delivery and branch access and things where you could make a more efficient network? Those are areas, I think, where you can really collaborate.
Sarah B. Nelson 19:49
I'm thinking about our audience right now and I'm curious what advice you would give to others. Maybe they're in banking, maybe they're not. When they're on their journey to modernization, how might they leverage some of their data to achieve their ESG goals?
Ronan Hughes 20:05
Well, I suppose from my perspective, having been part of this and other organizations and now within Bank of Ireland, and looking at the scale and scope of that, my advice to anybody would be understand your functionality and your actual business need, not just what's there and why it's there. So anything that could be built up over the years and only migrate and transform what is actually required. So you want to focus on doing it in a way that allows future growth and development as easily as possible. It should be completely invisible to people who are customers of the organization. And then at that point, once you've concluded that, you should be able to move forward with all the speed and determination of any new digital entrant or FinTech in the market. And you should have the advantage of years of experience, understanding growth and an established customer base.
Chris Davis 20:52
I couldn't agree more. Ronan. I guess I've written a few things down here. For me, too many projects/programs just get too complex. Keep everything simple. Your design simple, your approach simple, because then you can communicate it and you can bring people with you. The second, I think, linked to that simplification is be very, very clear on what you're trying to achieve. Again, keep it simple and focused. And then it has to be a whole organization mission. This isn't something that Ronan and his IT architects can do on their own. It's not something that even Ronan and Kyndryl can do together. It has to be a proper, whole organization effort. And for me, it really needs a business executive to lead someone who says, "This is why we're doing it." And it needs to be driven from a commercial reality. "This is why we're doing it. Because it's important to our business." If it's just, "Ronan and Chris had a great idea", when Ronan and Chris move on, the next wave will come in and change direction. Whereas, if it's rooted in commercial reality, the bank will be a better place, a better organization because we're doing this. It'll stay, it'll endure. No one organization can do this on its own. Get everyone together around that simple, clear message and collaborate.
Sarah B. Nelson 22:11
So, thank you so much for joining us. This has been a really wonderful discussion. I know we went in a lot of different directions, but it really feels like we narrowed into something that is very inspiring, and a challenge for all of us to do. So, thank you again for joining us.
Chris Davis 22:26
Thank you very much.
Ronan Hughes 22:28
Thank you.
Sarah B. Nelson 22:31
Thank you. That's the end of the episode today. We'll be back in two weeks for another episode, so come join us. Make sure to subscribe, share this with your colleagues, and we'll talk with you next time.